Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Welcome to Under the Banyan Tree, a weekly podcast that puts Asian markets and economics in context.
Speaker: My name is Fred Newman.
Speaker: I'm the Asia Chief Economist at HSBC.
Speaker: And I'm Harold van der Linde, HSBC's Asian equity strategist.
Speaker: Coming up on the show today, US markets are showing signs of bouncing back.
Speaker: We'll discuss what's behind those green arrows and whether Asian equities are taking the cues for Wall Street.
Speaker: And our head of Asian Internet and Gaming Research, Charlene Liu, joins us for a deep dive into the world of US-listed Chinese companies that may soon be forced to relist a lot closer to home.
Speaker: All that and more coming up under the Banyan Tree.
Speaker: So here we're obviously looking closely at Asian markets, but we also keep a wary eye on what's going on in the US.
Speaker: Now, the performance of the S&P has improved.
Speaker: Last month was actually the best performance since 2020.
Speaker: So, Harold, have things turned around?
Speaker: It seems a little bit like that.
Speaker: You're right.
Speaker: The S&P had a good performance, and in particular last week, it was up about 3% or so.
Speaker: That's quite a lot in one week.
Speaker: A lot of that seems to have coincided with some statements by the Fed, and I know you've looked at that, right?
Speaker: Yeah, there's some sense that inflation expectations in the U.S. are stabilizing, and some investors, of course, hope that that will allow the Fed to ease up a little bit at the margin on its tightening.
Speaker: And that, of course, helps to buoy investor sentiment quite a bit.
Speaker: But that's the U.S. What's going on here in Asia?
Speaker: How have Asian markets traded over the past two or three weeks?
Speaker: Well, it's actually a little bit of a mixed bag.
Speaker: So some markets have taken that cue from the US and have performed very well.
Speaker: Thailand is up 3% in the last week.
Speaker: India has actually done even a little bit better, close to 4%.
Speaker: The Chinese markets are much more mixed.
Speaker: There are multiple Chinese markets.
Speaker: So let's get this clear first.
Speaker: There is a market in Shanghai that's the largest Chinese market and primarily for domestic investors.
Speaker: There's one in Shenzhen actually as well.
Speaker: And then there is what we call the HSCEI, that is the Chinese companies listed in Hong Kong.
Speaker: And typically we're talking about that particular market.
Speaker: At those markets, the Shanghai market is down 1.5%, but actually the Hong Kong market is down over 2%.
Speaker: So it's been much weaker.
Speaker: So we have some of the Chinese related markets not performing quite as well.
Speaker: I'm sure that many factors are driving this, but I couldn't help but notice that there is a big topic in markets now, which is homecoming.
Speaker: Does that have something to do with that?
Speaker: What's really behind this idea of quote unquote homecoming?
Speaker: Yeah, homecoming is an important process that impacts how these markets perform to a certain extent.
Speaker: Let's put a little bit of history to this.
Speaker: Chinese companies have in the past very often gone to the US market and list there in order to obtain capital for the very simple reason that it's a very large and big market where you can actually do that rather easily.
Speaker: So many mainland Chinese companies are listed in the US.
Speaker: A lot of them are tech companies, but it doesn't have to be, it can be all sorts of companies.
Speaker: Now, by December 2020, that was under the days of the Trump administration, the U.S. said, we want these companies to disclose all kinds of information that we currently cannot get, all kinds of information on ownership and stuff like that, that the companies, until that particular point in time, were not able or willing to disclose.
Speaker: And if you don't do that, well, then you cannot be listed in the U.S. The deadline for that is actually 2024.
Speaker: And these companies have to make a choice.
Speaker: Are they going to disclose the information or are they going to come and list elsewhere in the world?
Speaker: And for many, of course, Hong Kong is the market to go for.
Speaker: So homecoming is this idea that Chinese companies by and large will delist in the U.S. and try to relist somewhere else, most likely in the U.S.
Speaker: in mainland China or maybe even in Hong Kong.
Speaker: Is that the idea behind homecoming?
Speaker: We bring the Chinese companies closer to the home markets?
Speaker: Yeah, absolutely.
Speaker: I mean, they could list anywhere else, but Hong Kong is the obvious market for them to go through.
Speaker: Now, one of the issues, of course, is, is there a sufficient amount of liquidity, capital, savings around in the region that could absorb if these companies go here?
Speaker: Because, as I said, initially they went to the U.S. because capital was there.
Speaker: The question is, is there capital here?
Speaker: Now, that's really an economic question for you, Fred.
Speaker: Well, partly of course the markets question is some technicals around liquidity etc.
Speaker: But if you take a step back, one of the interesting developments in Asia has been the accumulation of savings over the last two, three decades.
Speaker: And just from a simple model, this was a fairly poor region of the world several decades ago.
Speaker: It needed capital to develop.
Speaker: So international banks essentially brought international money
Speaker: to Asian companies to borrow and to invest in plants.
Speaker: What we've seen over the last decades or so is that the increase in Asian savings allows the funding of the investment needs locally.
Speaker: And that's what helps, I think, in this process by providing
Speaker: capital, Asian capital, to Asian companies here in the region.
Speaker: So that's the broader context of homecoming.
Speaker: But I know when it comes to Asian savings, you looked at it from a different angle, which is the retail investor, right?
Speaker: That's where a lot of the savings are actually sitting.
Speaker: Yeah, exactly.
Speaker: What we've seen over the last couple of years in the equity markets across the region is that the retail investors that invest in these markets, that they really become really big.
Speaker: 20, 25 years ago, it was really only foreign institutions, pension funds from Europe and the US that were investing in Asian stock markets.
Speaker: Now, 60 to 70% of the trading in the Korean stock market or in the Indian stock market is dominated by basically your mom and pops who buy a mutual fund or have some monthly scheme whereby they invest in these markets.
Speaker: So the retail investor has really emerged as a big supplier of capital.
Speaker: And you see that also the way Asian markets now trade versus how they trade in the West.
Speaker: That is, there's some resilience in Asian financial markets that we hadn't had previously.
Speaker: We see that in the bond markets.
Speaker: We see that, I imagine, in the equity markets as well.
Speaker: And that is really this idea that because Asian investors, whether retail, institutional,
Speaker: own a larger share of these financial assets they're less beholden to global developments so we see a lot of assets are held by asian private banks for example and that's indirectly the retail investor of course and that means that when u.s interest rates rise there's not this massive flow of capital back to the u.s some of it stays in the region and gives it more inherent
Speaker: stability in financial systems across the region.
Speaker: So that's really the backdrop for this increase in savings in Asia.
Speaker: But we want to bring it back really to this idea of homecoming.
Speaker: So is the broad idea here that after having listed in the US, these companies are now in a good position to come back into Hong Kong, for example, or mainland Chinese markets and just raise the capital locally?
Speaker: Are these markets big enough to absorb that?
Speaker: Yes, so Asia buys Asia, you could say.
Speaker: That is possible.
Speaker: The amount of trading that goes on in New York, though, is really, really big.
Speaker: So we cannot match that in Asia.
Speaker: So if you delist, say, from the US, say you go to Hong Kong, the amount of trading in your stock will come down.
Speaker: That's because there's a lot of high-frequency trading.
Speaker: That is not really apparent here in Hong Kong, for example.
Speaker: But that doesn't mean that these companies can't move here.
Speaker: There is sufficient amount of capital available.
Speaker: So they go for a listing here in Hong Kong to facilitate that move into these markets.
Speaker: So it sounds all very easy.
Speaker: We just delist companies in the US.
Speaker: We bring them back into the Hong Kong market or the mainland Chinese markets.
Speaker: But of course, it's never that easy, is it?
Speaker: A lot of technicalities we need to keep in mind.
Speaker: One of them, for example, is primary, secondary listings.
Speaker: What is that all about?
Speaker: Correct.
Speaker: So these companies have listed in the U.S. and we call that a primary listing.
Speaker: You do an initial public offering, an IPO in the U.S. market.
Speaker: Now they can go to the Hong Kong market and they can do that again as well, an IPO.
Speaker: But that comes with all kinds of requirements in terms of disclosure and account statements that you've got to fill in.
Speaker: For some companies, that's easy.
Speaker: For other companies, a little bit more difficult.
Speaker: What you can also do is to go for what we call a secondary listing.
Speaker: So you list here, but most of the shares are still traded elsewhere.
Speaker: And you could do that as long as you've been trading there, in the US in this case, for at least two years.
Speaker: So you have a secondary listing here.
Speaker: It's basically just a trading platform.
Speaker: But if you then delist from the US, you cannot just have a secondary listing.
Speaker: So you need to upgrade that directly.
Speaker: to a primary listing and meet all these additional requirements.
Speaker: That's one technicality.
Speaker: Another technicality is that it changes the nature of the Hong Kong market.
Speaker: You have many more tech companies that are listed in Hong Kong.
Speaker: They constituted less than 15% of the overall markets, say in 2019, when they were really big.
Speaker: At the moment, with all these companies moving, they constitute about 35, maybe to 40% of the market.
Speaker: So it changed the nature of the Hong Kong market.
Speaker: This is why we call this market the NASDAQ of the East.
Speaker: All right, well, clearly a lot to unpack here.
Speaker: For more, we want to bring in Charlene Liu, our head of Asian Internet and Gaming Equity Research.
Speaker: She'll be joining us on the line from Singapore in just a moment.
Speaker: Charlene, welcome to the podcast.
Speaker: Let me start by asking you, what are some of the challenges that companies face if they want to delist from the U.S. and then relist potentially in Hong Kong?
Speaker: Thanks for having me, Fred.
Speaker: Yes, I think some of the challenges that these companies would face would include they have to meet a separate set of requirements.
Speaker: And these would include hitting a certain size.
Speaker: From a market cap standpoint, they have to hit a certain size.
Speaker: And there are also separate sets of disclosure requirements.
Speaker: And more importantly, they have to be listed in the US for over two years.
Speaker: Charlene, if, for example, I own a stake in one of your companies that is listed in the US and they have a listing now also in Hong Kong, what do I do then?
Speaker: Can I buy in the US and sell in Hong Kong?
Speaker: How does that work?
Speaker: Well, what you have to do is you need to contact your custodian to instruct them to cancel your shares in the U.S., swap it for Hong Kong shares and register in Hong Kong.
Speaker: The process typically takes around two business days and there is a small fee on the back of the exercise.
Speaker: But stocks, dualist stocks in particular between the US and Hong Kong is fully fundable, i.e.
Speaker: you can swap them.
Speaker: So do we have any examples of companies who already did this, D-list in the US, Relist in Hong Kong?
Speaker: Has anybody really tested the pipes on how this process actually works?
Speaker: Sure.
Speaker: I think the most obvious example would be China Mobile, which has run the full process, but it doesn't fit the full bill because it did delist in the US, but it relisted in Shanghai.
Speaker: I think another good example would be Didi, which is the biggest rat hailing company in China.
Speaker: And they were under cybersecurity watch by China, and they were eventually delisted from the US, and they're seeking relisting in Hong Kong.
Speaker: Charlene, you look at Alibaba.
Speaker: They are now listed in the U.S. and in Hong Kong.
Speaker: How much of that is now being traded in Hong Kong?
Speaker: Have clients moved their holdings from the U.S. to the Hong Kong market?
Speaker: You're absolutely right.
Speaker: A lot of the companies under our coverage are dual listed in Hong Kong and the U.S. And Alibaba is sort of the perfect example.
Speaker: The company also announced that they have intention to go dual primary listed in both Hong Kong and the U.S.
Speaker: If you look at the current count, 60% of their share is already listed in Hong Kong.
Speaker: And if you were to look at the freely traded shares as a percentage of total shares, 36% of that is already traded in the Hong Kong market.
Speaker: Charlene, you mentioned the criteria that companies have to meet if they want to relist in Hong Kong.
Speaker: But what about companies that don't meet these criteria?
Speaker: If they have to delist in the U.S., what other options do they have?
Speaker: Are they just cut out here?
Speaker: They would be a bit caught out, Fred.
Speaker: So obviously, there are a few options that they could go for.
Speaker: First would be sort of a buyout.
Speaker: And obviously, that would be a very demanding cash requirement to kind of buy out all your investors.
Speaker: If not, then you would probably be holding delisted company shares, which is not frequently traded.
Speaker: That would be in the OTC market, which would be a big problem, particularly
Speaker: for mutual funds and institutional investors.
Speaker: Maybe adding to this a little bit, the timing here is really important because if I'm not mistaken, Charlene, the SEC has indicated that companies need to be audited by November this year so that then they can decide who can remain listed and who will be delisted, correct?
Speaker: So there's not a lot of time left.
Speaker: You're absolutely right.
Speaker: Let's put it this way.
Speaker: The deadline for delisting is in 2024.
Speaker: There is a United States Innovation and Competition Act, and it does contain a clause to accelerate the delisting deadline to 2023.
Speaker: The bill is still being debated, so we don't know whether it would actually come through.
Speaker: But basically, the base case is if they do not meet the requirement, then all these would have to be delisted by 2024.
Speaker: Well, you've given us a lot to think about, Charlene.
Speaker: It's a very complex topic.
Speaker: Thanks for helping us to break this down.
Speaker: I'm sure we'll see a lot more about this as some of these deadlines are getting closer.
Speaker: Thanks a lot for joining us today.
Speaker: Yeah, thanks a lot, Charlene.
Speaker: Thank you.
Speaker: The pleasure is mine.
Speaker: Well, great insight there from Charlene, our colleague in Singapore.
Speaker: What I thought in particular is interesting is the timeframe here.
Speaker: We don't have a lot of time.
Speaker: These companies need to make a decision where they're going to be listed and or disclose all that information.
Speaker: And of course, companies need to be listed, right?
Speaker: If they're not listed, then as Charlene said, shares need to be traded on the OTC market, which is over the counter, which essentially it's not an exchange.
Speaker: It's just individuals trading these stocks outside of the market and there is no liquidity.
Speaker: So that's a challenge.
Speaker: And if you hold these particular stocks that are being delisted.
Speaker: That's correct.
Speaker: Now, before we end the show, those of you who listened to last week's podcast know that we gather under the banyan tree not only to talk about markets and economics or politics, but also just to shoot the breeze.
Speaker: So what's been on your mind this week, Fred?
Speaker: Well, Harold, to turn away from the Hong Kong heat this summer, I would try to stay indoors a bit more.
Speaker: And of course, we're blessed here in Hong Kong with having fantastic art exhibitions in the last few months.
Speaker: And one artist that I keep coming back to is Zhao Wuki, as he's known in the West.
Speaker: The Chinese pronunciation is a little bit different.
Speaker: But a Chinese artist who went to France and produced abstract art.
Speaker: And there was a fantastic exhibition there.
Speaker: we had here a few months ago in Hong Kong and those images still remain with me and try to keep me a bit cool in those hot summer days here.
Speaker: But what's on your mind?
Speaker: Well art has been on my mind actually as well.
Speaker: But I've gone out into the heat to visit two new museums that have opened up recently in Hong Kong.
Speaker: The first one is M Plus.
Speaker: It's a beautiful kind of, I'd say, modern art museum.
Speaker: But the other one that I visited only last week is the Hong Kong Palace Museum where there's a lot of art from
Speaker: the Beijing Forbidden City that has come to Hong Kong.
Speaker: And an interesting feature there is, I think it's on the first floor, whereby they show the daily life of people in the palace in Beijing in the past.
Speaker: I didn't know that emperors would wake up at four in the morning and start to do all their work.
Speaker: It took them an hour to get dressed or have people to get them dressed.
Speaker: But do all their work until about seven in the morning before they had even breakfast.
Speaker: Very hardworking bunch of people in those days.
Speaker: Indeed, they were.
Speaker: Well, that's all we've got time for today, folks.
Speaker: Thanks again for joining us under the banyan tree.
Speaker: We'll be back again at the same time next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
